3 What Is Internal Control ? “A process effected by an entity’s board of directors,management and other personnel,designed to provide reasonable assurance regarding the achievements of objectives in the following categories:Effectiveness & efficiency of operations.Reliability of financial reporting.Compliance with applicable laws and regulations.”
4 Internal control is a process Internal control is a process. It is a means to an end, not an end in itself.Internal control is effected by people. It’s not merely policy manuals and forms, but people at every level of an organization.Internal control can be expected to provide only reasonable assurance, not absolute assurance, to an entity’s management and board.Internal control is geared to the achievement of objectives in one or more separate but overlapping categories.
5 Components Of Internal Control Control Environment.Risk Assessment.Control Activities.Information & Communication.Monitoring.
7 Control Environment Sets the tone of the organization. The foundation for all other components.It includes the integrity,ethical values and competence of the people.Reflects: management’s philosophy & operating style,the way management assigns authority and responsibility and organizes and develops its people, and the attention and direction provided by the board of directors.
8 Risk Assessment Every entity faces internal &external risks. Every entity sets objectives.Risk assessment is the identification and analysis of relevant risks to achievements of the objectives.
9 Control ActivitiesThe policies and procedures that help ensure management directives are carried out.They help ensure that necessary actions are taken to address risks.Control activities occur throughout the entity at all levels and in all functions.They include activities such as approvals , authorization,reconciliations and segregation of duties.
10 Information & Communication Relevant information must be identified , captured and communicated in a form & timeframe that enables people to carry out their responsibilities.Information systems produce reports containing operational,financial and compliance –related information that make it possible to run and control the business.Effective communication must occur in a broader sense,flowing down,across and up the organization.
11 Monitoring Internal control systems need to be monitored. Types of monitoring:- ongoing during the course of operations.- evaluation for which the scope and frequency will depend primarily on an assessment of risks and the effectiveness of ongoing monitoring procedures.
12 Responsibilities Who is responsible for internal control ? Everyone ! Board of Directors :Governance,guidance & oversightManagement : CEO is the ownerInternal Auditors: evaluate & monitorOther personnel :information and communication
13 What Internal Control Can Do It can help achieve performance & profitability targets.It can help prevent loss of resources.It can help ensure reliable financial reporting.It can help ensure compliance with laws.It can help an entity get to where it wants to go,and avoid pitfalls and surprises along the way.
14 What Internal Control Cannot Do It cannot ensure success.It cannot ensure the reliability of financial reporting.It cannot ensure compliance with laws and regulations.Internal controls ,no matter how well designed and operated,can provide only reasonable assurance to management regarding achievements of an entity’s objectives.
15 Limitations of Internal Control Judgement.Breakdowns.Management override.Collusion.Costs Versus Benefits.